Transparency: A Test for the Cooperative System

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“Democracy Dies in Darkness.”

That is the official slogan of The Washington Post, adopted in 2017. The slogan was introduced on the newspaper’s website on February 22, 2017. The phrase was popularized by investigative journalist Bob Woodward, who used it in a 2007 piece criticizing government secrecy.

In September, long-time credit union supporter and reporter Frank Diekmann published an “editorial” on the CUToday website, Why NCUA Should Require Credit Unions to Disclose What They’re Paying for Banks.

Based on years of covering bank purchases, he critiques the absence of meaningful data in many of these transitions. No information is provided, such as the purchase price, that would show how the members’ collective capital is being used to pay off owners of banks. Here is some of his logic:

“Why the secrecy?

“It’s quite the hypocritical disconnect for a CU community that defends the federal tax exemption largely on the back of the “structure,” that is that credit unions are democratically run cooperatives where the members are the owners, to then turn around and say certain information belongs to some but not others (never a good sign in a democracy) and that some cooperators are more equal than others.

“There is another big, CU-principal-grounded reason for letting members know how much of their money is being spent and for what, and it’s a real ironic kicker: if the acquiring credit union were a publicly traded bank buying up another bank, it would be required to disclose the purchase price, and analysts/customers/the market would have the opportunity to put the ROI under the microscope. . .

“And then there is this other “let’s not go there” issue. But I say, let’s do. While this may not be the primary reason for buying a bank, it’s also not an innocent bystander: CEOs who have language in their contracts tying their compensation to asset size are getting raises out of these deals. Members have a right to know about that, especially since—again—it’s their money being used to goose the comp.

“It’s time to dispense with the rosy sounding but generic banality and to specifically document how members of the acquiring credit union benefit, and how the former customers are better off, with some real dollar figures around the savings on loans and fees and the increased rates on deposits. You know, how much more is going into people’s pockets?”

Transparency is the lifeblood of democracy

Frank’s concern about credit union’s secrecy extends far beyond bank purchases. Boards and CEOs have grown used to not disclosing or even explaining anything to members, especially around their leadership roles and activities.

Credit unions want to retain their “private” character, but to act unfettered in the public marketplace. CEO and board salaries are not required to be disclosed by federal charters. For states, the information is supposed to be provided in the 990 filings, but it is often late after the major participants have left, and not reviewed by any authority for accuracy. Many credit unions check the disclosure box on the report as provided only “on demand.”

While some merger disclosures were required from a 2018 rule, NCUA’s oversight of the rule is inconsistent and lacking in any meaningful effort to inform members about the transaction. Merger actors have perfected the arts of circumventing required benefit disclosures.

The supposed democratic governance model of one person one vote in annual board elections never happens, because there are no elections. The board controls the nominations to just equal the vacancies.

Even when the rare election takes place, the ability of members to learn about candidates’ position is not offered by the credit union-except for incumbents. See the SECU board contest as an example.

In almost all other institutions dealing with the public, the SEC mandates disclosures far beyond anything credit unions provide so that owners of companies can be informed about the basis for transactions.

The NCUA has completely ignored any obligation to protect the rights of member-owners compromising the fundamental governance mechanism in a cooperative.

Transparency is a requirement for democracy

It’s no accident that the Post’s motto was aimed at governmental secrecy. The one exception I would raise to Frank’s thesis is that he wants The NCUA to require greater disclosure. The regulators are part of the problem.

The NCUA repeatedly draws its own curtains of secrecy over its actions and even “facts.” Listen closely to September’s hearing on the NCUSIF for reference to undisclosed econometric models and staff actions not subject to public or even board scrutiny.

When the NCUA chair was asked about a well-publicized problem in a credit union, he commented that he couldn’t talk about such situations and pivoted to the need for more authority over vendors. The NCUA itself fails to put on the public record the details for its decisions leaving both members and the industry in the dark about its effectiveness or even awareness of key events.

The transparency advantage

Frank closes with another reason, beyond the owner’s right for relevant information to make informed decisions about the credit union’s activities.

It is a moral issue that can put cooperatives on the ethical high ground or cast them as just another form of self-serving enterprise:

“Not only would documenting all that (about bank purchases) be the right and ethical thing to do, it would make for an effective response to critics. . . that claim credit unions are just “profit-seeking enterprises masquerading as tax-exempt non-profits.”

Transparency is a leadership requirement. It creates trust and confidence even when things go wrong. Doing the right thing should not require a rule or reg. It is a character trait. Cooperatives and transparency are naturally intertwined, until pulled apart. As Frank points out, that separation undermines the special possibilities and accomplishments cooperatives were empowered to do.

Author

  • Chip Filson

    A nationally recognized leader in the credit union industry, Filson is an astute author, frequent speaker, and consultant for the credit union movement. He has more than 40 years of experience in government, financial institutions, and business. Chip co-founded Callahan and Associates. Filson has held concurrent positions at the NCUA as president of the Central Liquidity Facility and Director of the Office of Programs, which includes the NCUSIF and the examination process. He holds a magna cum laude undergraduate degree in government from Harvard University. After being awarded a Rhodes Scholarship, he earned a master’s degree in politics, philosophy, and economics from Oxford University in England. He also holds an MBA in management from Northwestern University’s Kellogg School in Chicago.

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